Ch04 Discussion Light

©2004 by South-Western/Thomson Learning 1

The Internal Organization: The Internal Organization: Resources, Capabilities, andResources, Capabilities, and

Core CompetenceCore Competence

Robert E. Hoskisson

Michael A. Hitt

R. Duane Ireland

Chapter 4Chapter 4

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Chapter 2Chapter 2Strategic LeadershipStrategic Leadership

Chapter 4Chapter 4The InternalThe InternalOrganizationOrganization

Chapter 6Chapter 6Competitive Rivalry andCompetitive Rivalry andCompetitive DynamicsCompetitive Dynamics

Chapter 9Chapter 9International StrategyInternational Strategy

Chapter 1Chapter 1Introduction toIntroduction to

Strategic ManagementStrategic Management

Chapter 3Chapter 3The ExternalThe ExternalEnvironmentEnvironment

Chapter 5Chapter 5Business-LevelBusiness-Level

StrategyStrategy

Chapter 8Chapter 8Acquisition andAcquisition and

Restructuring StrategiesRestructuring Strategies

Chapter 11Chapter 11Corporate GovernanceCorporate Governance

Chapter 7Chapter 7Corporate-Level StrategyCorporate-Level Strategy

Chapter 10Chapter 10Cooperative StrategyCooperative Strategy

Chapter 12Chapter 12Strategic EntrepreneurshipStrategic Entrepreneurship

StrategicAnalysis

StrategicThinking

CreatingCompetitiveAdvantage

MonitoringAnd CreatingEntrepreneurialOpportunities

The Strategic Management ProcessThe Strategic Management Process

Strategic IntentStrategic IntentStrategic MissionStrategic Mission

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Discussion QuestionsDiscussion Questions1. What different perspectives are

gained from external compared to internal analyses of the firm?

2. What is the difference between tangible and intangible resources? What is the difference between resources and capabilities?

3. What are the criteria to determine core competence? What is sustainable competitive advantage?

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Discussion Questions (cont.)Discussion Questions (cont.)

4. What is the value chain?

5. What is outsourcing and when should it be used?

6. Are there risks to a sustainable competitive advantage?

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Discussion Question 1Discussion Question 1

What different perspectives are gained from external compared to internal analyses of the firm?

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ExternalExternal and Internal Analyses and Internal Analyses

General

General

Env

iron

men

t

Env

iron

men

t

GeneralGeneral

EnvironmentEnvironment

Gen

eral

Gen

eral

Environm

ent

Environm

ent

SocioculturalSociocultural

Global

Global

TechnologicalTechnological

Polit

ical

/Leg

al

Polit

ical

/Leg

al

Dem

ogra

phic

Dem

ogra

phic Econom

ic

Economic

IndustryIndustryEnvironmentEnvironment

CompetitorCompetitorEnvironmentEnvironment

By studying the external By studying the external environment, firms identify environment, firms identify what they what they might choose to domight choose to do

Opportunities and threatsOpportunities and threats

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ExternalExternal and Internal Analysesand Internal Analyses

By studying the internal By studying the internal environment, firms identify environment, firms identify what they what they can docan do

Unique resources, Unique resources, capabilities, and core capabilities, and core competenciescompetencies

(sustainable competitive (sustainable competitive advantage)advantage)

External and External and InternalInternal Analyses Analyses

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Components ofComponents ofInternal AnalysisInternal Analysis

Discovering CoreDiscovering CoreCompetenciesCompetencies

ResourcesResources• TangibleTangible• IntangibleIntangible

CapabilitiesCapabilities

CoreCoreCompetenciesCompetencies

CompetitiveCompetitiveAdvantageAdvantage

Value CreationValue Creation

Four CriteriaFour Criteriaof Sustainableof SustainableAdvantagesAdvantages

• ValuableValuable• RareRare• Costly to ImitateCostly to Imitate• NonsubstitutableNonsubstitutable

ValueValueChainChain

AnalysisAnalysis

• OutsourceOutsource

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Challenge of Internal AnalysisChallenge of Internal Analysis How do we effectively manage current core How do we effectively manage current core

competencies while simultaneously competencies while simultaneously developing new ones?developing new ones?

How do we assemble bundles of resources, How do we assemble bundles of resources, capabilities and core competencies to capabilities and core competencies to create value for customers?create value for customers?

How do we learn to change rapidly?How do we learn to change rapidly?

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Conditions Affecting Managerial Conditions Affecting Managerial Decisions About Resources, Capabilities, Decisions About Resources, Capabilities, and Core Competenciesand Core Competencies

UncertaintyUncertainty regarding characteristics of the regarding characteristics of the general and the industry environments, general and the industry environments, competitors’ actions, and customers’ preferencescompetitors’ actions, and customers’ preferences

ComplexityComplexity regarding the interrelated causes regarding the interrelated causes shaping a firm’s environments and perceptions of shaping a firm’s environments and perceptions of the environmentsthe environments

Intraorganizational ConflictsIntraorganizational Conflicts among among people making managerial decisions and those people making managerial decisions and those affected by themaffected by them

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What is the difference between tangible and intangible resources? What is the difference between resources and capabilities?

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Resources are what a firm has Resources are what a firm has to work with--its assets--to work with--its assets--including its people and the including its people and the value of its brand namevalue of its brand name

Resources represent inputs into Resources represent inputs into a firm’s production process... a firm’s production process... such as capital equipment, skills such as capital equipment, skills of employees, brand names, of employees, brand names, finances and talented managersfinances and talented managers

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Tangible ResourcesTangible Resources• FinancialFinancial• OrganizationalOrganizational• PhysicalPhysical• TechnologicalTechnological

Intangible ResourcesIntangible Resources• HumanHuman• InnovationInnovation• ReputationReputation

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Capabilities become important when they are combined Capabilities become important when they are combined in unique combinations which create core competencies in unique combinations which create core competencies which have strategic value and can lead to competitive which have strategic value and can lead to competitive advantageadvantage

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Capabilities are what a firm does, and represent the firm’s Capabilities are what a firm does, and represent the firm’s capacity to deploy resources that have been purposely capacity to deploy resources that have been purposely integrated to achieve a desired end stateintegrated to achieve a desired end state


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What are the criteria to determine core competence? What is sustainable competitive advantage?

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CoreCoreCompetenciesCompetencies

Core competencies are resources and capabilities that serve Core competencies are resources and capabilities that serve as a source of competitive advantage over rivalsas a source of competitive advantage over rivals

Core competencies distinguish a company competitively Core competencies distinguish a company competitively and make it distinctiveand make it distinctive

McKinsey and Co. recommends using three to four McKinsey and Co. recommends using three to four competencies when framing strategic actionscompetencies when framing strategic actions

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Valuable:Valuable: Capabilities that help a firm neutralize threats or Capabilities that help a firm neutralize threats or exploit opportunitiesexploit opportunities

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RareRare: Capabilities that are not possessed by many others: Capabilities that are not possessed by many others

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Costly to imitate:Costly to imitate: capabilities that other firms cannot capabilities that other firms cannot develop easily, usually due todevelop easily, usually due to

• Unique historical conditionsUnique historical conditions• Causal ambiguityCausal ambiguity• Social complexitySocial complexity

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Nonsubstitutable: capabilities that do not have strategic Nonsubstitutable: capabilities that do not have strategic equivalentsequivalents

• Invisible to competitorsInvisible to competitors• Firm specific knowledgeFirm specific knowledge• Trust-based working relationships between managers Trust-based working relationships between managers

and nonmanagerial personneland nonmanagerial personnel

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Core Competence as a Strategic Core Competence as a Strategic CapabilityCapability

ResourcesResources• Inputs to a firm’s Inputs to a firm’s

production processproduction process

CapabilityCapability• A nonstrategicA nonstrategic

team or resourceteam or resource

Core CompetenceCore Competence• A strategicA strategic

capabilitycapability

The source ofThe source of

Does it satisfy the Does it satisfy the criteria of sustainable criteria of sustainable competitive competitive advantage?advantage?

YesYes

NoNo

CapabilityCapability• An integration of aAn integration of a

team of resourcesteam of resources

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Sustainability of a Competitive Sustainability of a Competitive AdvantageAdvantage Sustainability of a competitive advantage Sustainability of a competitive advantage

is a function of:is a function of:– the rate of core-competence obsolescence due the rate of core-competence obsolescence due

to environmental changesto environmental changes– the availability of substitutes for the core the availability of substitutes for the core

competencecompetence– the imitability of the core competencethe imitability of the core competence

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Performance ImplicationsPerformance Implications

Valuab

le?

Valuab

le?

Rare?

Rare?

Costly

to Im

itate?

Costly

to Im

itate?

Nonsu

bstit

utable

Nonsu

bstit

utable

CompetitiveCompetitiveConsequencesConsequences

PerformancePerformanceImplicationsImplications

NoNo NoNo NoNo NoNoCompetitiveCompetitiveDisadvantageDisadvantage

Below AverageBelow AverageReturnsReturns

YesYes NoNo NoNoYes/Yes/NoNo

CompetitiveCompetitiveParityParity Average ReturnsAverage Returns

YesYes YesYes NoNoYes/Yes/NoNo

Temporary Com-Temporary Com-petitive Advantagepetitive Advantage

Above Average to Above Average to Average ReturnsAverage Returns

YesYes YesYes YesYes YesYesSustainable Com-Sustainable Com-petitive Advantagepetitive Advantage

Above Average Above Average ReturnsReturns


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What is the value chain?

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ServiceService

Marketing & SalesMarketing & Sales

Outbound LogisticsOutbound Logistics

OperationsOperations

Inbound LogisticsInbound LogisticsFirm

Inf

rast

ruct

ure

Firm

Inf

rast

ruct

ure

Hum

an R

esou

rce

Mgm

t.H

uman

Res

ourc

e M

gmt.

Tec

hnol

ogic

al D

evel

opm

ent

Tec

hnol

ogic

al D

evel

opm

ent

Pro

cure

men

tP

rocu

rem

ent

Margin Margin

Primary ActivitiesPrimary Activities

Sup

port

Act

ivit

ies

Sup

port

Act

ivit

ies

The BasicThe BasicValue ChainValue Chain

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Questions

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What is outsourcing and when should it be used?

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Margin

Margin Margin

Margin

Primary ActivitiesPrimary Activities

Su

ppo

rt A

ctiv

ities

Su

ppo

rt A

ctiv

ities

OutsourcingOutsourcing

Outsourcing is the Outsourcing is the purchase of some or purchase of some or all of a value-all of a value-creating activity creating activity from an external from an external suppliersupplier

Usually this is Usually this is because the specialty because the specialty supplier can provide supplier can provide these functions more these functions more efficientlyefficiently

ServiceService

Marketing & SalesMarketing & Sales

Outbound LogisticsOutbound Logistics

OperationsOperations

Inbound LogisticsInbound LogisticsFir

m In

fra

stru

ctu

reF

irm

Infr

ast

ruct

ure

Hu

ma

n R

eso

urce

Mg

mt.

Hu

ma

n R

eso

urce

Mg

mt.

Te

chn

olo

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l Dev

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pm

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tT

ech

nol

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cal D

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nt

Pro

cure

me

nt

Pro

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me

nt

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Strategic Rationales for OutsourcingStrategic Rationales for Outsourcing Improve Business FocusImprove Business Focus

– lets company focus on broader business lets company focus on broader business issues by having outside experts handle issues by having outside experts handle various operational detailsvarious operational details

Provide Access to World-Class Provide Access to World-Class CapabilitiesCapabilities– the specialized resources of outsourcing the specialized resources of outsourcing

providers makes world-class capabilities providers makes world-class capabilities available to firms in a wide range of available to firms in a wide range of applicationsapplications

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Strategic Rationales for OutsourcingStrategic Rationales for Outsourcing Accelerate Business Re-Engineering Accelerate Business Re-Engineering

BenefitsBenefits– achieves re-engineering benefits more quickly achieves re-engineering benefits more quickly

by having outsiders--who have already by having outsiders--who have already achieved world-class standards--take over achieved world-class standards--take over processprocess

Share RisksShare Risks– reduces investment requirements and makes reduces investment requirements and makes

firm more flexible, dynamic and better able to firm more flexible, dynamic and better able to adapt to changing opportunitiesadapt to changing opportunities

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Strategic Rationales for OutsourcingStrategic Rationales for Outsourcing Free Resources for Other PurposesFree Resources for Other Purposes

– permits firm to redirect efforts from non-core permits firm to redirect efforts from non-core activities toward those that serve customers activities toward those that serve customers more effectivelymore effectively


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Outsourcing IssuesOutsourcing Issues Greatest ValueGreatest Value

– outsource only to firms possessing a core outsource only to firms possessing a core competence in terms of performing the primary or competence in terms of performing the primary or support activity being outsourcedsupport activity being outsourced

Evaluating Resources and CapabilitiesEvaluating Resources and Capabilities– don’t outsource activities in which the firm itself don’t outsource activities in which the firm itself

can create and capture valuecan create and capture value Environmental Threats and Ongoing TasksEnvironmental Threats and Ongoing Tasks

– do not outsource primary and support activities do not outsource primary and support activities that are used to neutralize environmental threats that are used to neutralize environmental threats or complete necessary ongoing organizational or complete necessary ongoing organizational taskstasks

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Outsourcing IssuesOutsourcing Issues Nonstrategic Team of ResourcesNonstrategic Team of Resources

– do not outsource capabilities that are critical to do not outsource capabilities that are critical to their success, even though the capabilities are their success, even though the capabilities are not actual sources of competitive advantagenot actual sources of competitive advantage

Firm’s Knowledge BaseFirm’s Knowledge Base– do not outsource activities that stimulate the do not outsource activities that stimulate the

development of new capabilities and development of new capabilities and competenciescompetencies

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Are there risks to a sustainable competitive advantage?

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Core Competencies: Cautions Core Competencies: Cautions and Remindersand Reminders Never take for granted that core Never take for granted that core

competencies will continue to provide a competencies will continue to provide a source of competitive advantagesource of competitive advantage

All core competencies have the potential All core competencies have the potential to become to become core rigiditiescore rigidities

Core rigidities are former core Core rigidities are former core competencies that now generate inertia competencies that now generate inertia and stifle innovationand stifle innovation

Ch04 Discussion Light

Business

core competencies capabilities

rivals core competencies

current core competencies

unique resources

external environment

bundles of resources

internal environment

strategic management